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B2B Debt Collection: How To Prepare Your Business

Topics: Finance, Management

In a perfect world, our customers would pay us on time every time. But unfortunately, that Goldilocks world just isn't the way it happens in real life. We have to be prepared for cases when customers don't pay on time and simply refuse to pay at all.

B2B debt collection is altogether different from B2C debt collection. With business collections, invoices are usually larger, contracts can be in place, and relationships heavily established.

Trying to collect from a company through more moderate means should be your first consideration. Once a less aggressive approach has been exhausted, involving outside help is usually the next step.

We've covered a few points on trying to collect debt from a company here. Now we'll go into more detail on this process.

Avoiding Business Debt Collection

Having a system in place is your first line of defense in avoiding B2B debt collection. Luckily, most businesses will already have a system in place. This includes:

  • Good bookkeeping
  • Receipts of any mailings
  • Archiving all related emails
  • Notes from various telephone calls once a business goes past their invoice due date
  • Terms and conditions for your invoices

The above trail of communication and audits will be used by an attorney or collections business, should such entities be needed.

Having a plan of how to handle overdue invoices using nonaggressive means is fairly common practice. When trying to collect on an overdue debt where communication with the company is still open, one option is a payment arrangement.

In some cases, payment arrangements can lead to payment restructuring or discounting the debt.

Assuming a nonaggressive means of collection doesn't work, resorting to a more aggressive approach is usually the next step.

Initiating More Aggressive Debt Collection Processes

At this point, you have exhausted your overdue invoice plan. Nothing seems to be working in collecting the debt and the process is taking up a lot of your valuable time as well.

It's time to get help in collecting the debt. The main entity who will get involved at this point is an attorney or a collection agency. Below we discuss which you might want to consider and why.

Keep in mind that involving outside entities and going this route usually means you won't collect 100% of the debt. This is because of two main factors:

  • Fees
  • Probability of pursued business paying full debt is low

In some cases, the business may even file for bankruptcy and delay making any payment until the bankruptcy process has completed.

With these preliminary considerations in mind, it's time to figure out if an attorney is needed or a collection agency.

Attorney vs Collection Agencies

Sending correspondence from an attorney or collection agency can result in the debtor taking these entities more serious than your correspondence. Additionally, correspondence from an attorney can have higher impact than correspondence from a collections agency.

Let's start by considering what's involved when using an attorney.

Attorney costs are usually higher than that of collection agencies. A rule of thumb is that if the amount being pursued is less than $5000, involving an attorney probably isn't worth the cost. 

For higher amounts, keep in mind that you may be able to sue for court cost and attorney fees in addition to the debt being collected.

As mentioned previously, an attorney has the advantage of likely being taken more serious than an agency.

Speaking of collection agencies, this is probably the route you want to take for an amount under $5000. It won't cost as much as an attorney.

When researching agencies, find one that specializes in your field of business. Their experience and knowledge in the specific space will be valuable to a successful outcome. A few other things to check for include:

  • State-licensed and/or bonded (where applicable)
  • Insurance (Errors and Omissions Liability Insurance)
  • Ability to find debtors who may have skipped town (skip tracing). This may require an agency who is licensed in all states involved.
  • References
  • Check ACA International 
  • Better Business Bureau 

Be clear on the agency's fee structure so there aren't any surprises when you get the bill. Fee structures can vary by agency but are usually tier structured. You should be able to get an agreement on fees up front. 

Some agencies won't charge a fee unless the debt is collected. At that point, the fee can be a percentage of the collected debt

As a side note, it's important to know that you or your collection agency can't harass debtors, cheat, lie, or use other dishonest methods to collect on outstanding accounts. It's actually illegal to do so per the Fair Debt Collection Practices Act.

Taking Debtor to Court

B2B-debtIn some cases, small claims court might be a good option for collecting on outstanding debt. Below is what that process looks like.

One advantage to using small claims court instead of an attorney or debt collection agency is the cost. You don't have to give up a percentage of the collected debt to another entity.

Be aware that there are maximum amounts that you can sue for. The amount varies by state. If the maximum amount in your state is $10000 and you are suing for $15000, if you win, you will be awarded $10000 and have to write off $5000. 

Also, states have a statute of limitations that can range from 2 to 15 years. Be sure to check your state's statute of limitations.

There are cost associated with small claims court filings. These are usually in the hundreds of dollars rather than in the thousands. The amount will vary depending on your specific filings and state.

Assuming you do win, you'll then need to collect on the amount owe'd to you. Remember, going the court route means you are basically doing everything on your own. Contact the defendant and let them know you are owe'd  the won amount. If there is still no response, you can garnish their employment wages. If they aren't employed, you can put a lien on their property.

Which Route is Best for You?

Determining the best route to take when collecting a B2B debt can be simplified to those wanting to do everything on their own vs getting assistance. If you need assistance, hiring an attorney or debt collection agency is the way to go. If you have the time, want to save money and don't mind handling everything on your own, small claims court may be the best route.

Knowing how to choose between an attorney and debt collections agency involves a few factors. The first thing is to check with each. Simply talk with each entity, let them know your situation and get a few numbers on cost.

Collecting on B2B debt isn't something we as business owners want to spend our time doing. Unfortunately, debt collection is simply a part of doing business. But being prepared can help decrease frustration and time spent when it comes time to collect a debt.

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